Dulling the Impact of the Stress Tests


Something trivial or commonplace that concludes a series of significant events

This is not a discussion of whether or not the upcoming 19-bank stress test results are important or whether or not they should have been conducted in the first place.  Instead, the subject I’ll pontificate on here is the masterful dissemination of the potentially disruptive information and how well the Obama team handled this particular tempest in a teacup.

The representatives of the US Government (aka the World’s Largest Hedge Fund) were, even as of a month ago, unsure of who was responsible for releasing the results of the stress tests to the public.  The CEOs of the subject banks got their assessments by driving downtown to pick them up.

But which agency or government body was to alert the media when the time came?  And what would the impact be on the shares and debt of banks that fared poorly under the calculations?  This was a conundrum that was first chronicled on Bloomberg:

From Bloomberg (4/19):

With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcement and the fact that none of the various officials at the Fed, FDIC or Treasury would step up and take the reins was even more pathetic.

The other big problem was that the mere existence of these stress tests even existing was a damned if you do, damned if you don’t situation for Tim Geithner & Co.  As I quoted in an earlier post:

If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.

But a funny thing happened on the way to the catch-22…Obama’s guys outsmarted everyone with a slow and gradual leak of enough stress test information to literally render the actual data’s impact meaningless upon release.

First, they dribbled out the parameters of how the tests were conducted and under what circumstances.  Then they leaked the fact that they were deliberately harsher on regional banks.  Next, they waged a discussion in the media about the fact that Citigroup and Bank of America were looking to appeal the results that they’d been shown about their own banks.  Yesterday, two separate reports came out about how Citigroup may need another $10 billion in new money and B of A may need tens of billions to put on a pretty face before the results would come later this week.

This morning yet another leak: “WSJ says 10 of the 19 need to raise new capital.”…the leaks are comin’ through like from a damaged Dutch Dike (my lord I hope I used that term correctly).

At this point, there is enough information out there that no one is going to go haywire over the actual results themselves.  Geithner’s problem has been solved by a nuanced and finnessed campaign to blunt the report’s impact so as to avoid a major disruption in the financial markets.

Nuance is something the Bush administration didn’t exactly do well, or try to do well.  This new approach from the Obama administration is going to take some getting used to.

Bravo on the handling of the stress tests.  I was advocating for a rip-off-the-band-aid approach at dissemination last month, but now I see that there was another, smoother way all along.

Read Also: Stress Tests – Capitalism Without Competition